Forex Rigging Fines Could Run Up to $41 Billion

There are ongoing investigations on both sides of the Atlantic into Forex rigging. According to an article in Bloomberg the sum total of fines for these misbehaviors could run as high as $41 Billion!

Probes into allegations that traders rigged foreign-exchange benchmarks could cost banks as much as $41 billion to settle, Citigroup Inc. (C) analysts said.

Deutsche Bank AG (DBK) is seen as probably the “most impacted” with a fine of as much as 5.1 billion euros ($6.5 billion), Citigroup analysts led by Kinner Lakhani said yesterday, estimating the Frankfurt-based bank’s settlements could reach 10 percent of its tangible book value, or its assets’ worth.

Using similar calculations, Barclays Plc (BARC) could face as much as 3 billion pounds ($4.8 billion) in fines and UBS AG (UBSN) penalties of 4.3 billion Swiss francs ($4.6 billion), they wrote in a note first sent to clients on Oct. 3.

Basically dealers stepped in to make profitable trades ahead of their clients and conspired in online chat rooms to rig currency benchmarks. As investigations have progressed traders and their supervisors have been fired or put on indefinite leaves of absence. As the news report shows, the sum total of Forex rigging fines could be very impressive.

Forex Benchmarks

An interesting article in Investopedia discusses How the Forex Fix May Be Rigged.

The closing currency “fix” refers to benchmark foreign exchange rates that are set in London at 4 p.m. daily. Known as the WM/Reuters benchmark rates, they are determined on the basis of actual buy and sell transactions conducted by forex traders in the interbank market during a 60-second window (30 seconds either side of 4 p.m.).The benchmark rates for 21 major currencies are based on the median level of all trades that go through in this one-minute period.

The importance of the WM/Reuters benchmark rates lies in the fact that they are used to value trillions of dollars in investments held by pension funds and money managers globally, including more than $3.6 trillion of index funds. Collusion between forex traders to set these rates at artificial levels means that the profits they earn through their actions ultimately comes directly out of investors’ pockets.

In short, traders shared information about trades immediately before the 4 pm window thus rigging the end of day Forex fix. Considering that the world Forex market turns over more than $5 Trillion a day there was a lot of money to be made in small increments by rigging Forex benchmarks.

Negotiating a Solution Including Fines

U.K. regulators are discussing the Forex rigging issue and Forex rigging fines with major banks. The Wall Street Journal reports:

British regulators held meetings this week with six major banks about potentially settling a long-running investigation into possible manipulation of currencies markets, according to people familiar with the talks.

The U.K.’s Financial Conduct Authority held preliminary settlement talks with executives and lawyers from U.S. banks Citigroup Inc. C -0.41% and J.P. Morgan Chase & Co., the U.K.’s Barclays PLC, Royal Bank of Scotland Group RBS.LN +1.22% PLC and HSBC Holdings HSBA.LN +0.94% PLC, and Switzerland’s UBS AG UBSN.VX +1.23% , these people said.

Authority officials, including Chief Executive Martin Wheatley, told the bank officials that the regulator’s goal is to reach a group settlement with the six banks in the next eight weeks, one person said, although that timetable could be delayed. The authority told the banks they should each expect to pay the U.K. regulator more than the £160 million ($261 million) that UBS paid in 2012 to settle the U.K.’s probe into interest-rate rigging, the people said.

The end result, hopefully, of large Forex rigging fines is that traders will be hesitant to do this again.